10 biggest market-moving events this week

A bank default in Portugal, more M&A deals and worries about overheated stocks led the news

MarketWatch rounded up the 10 most important news events of the past week. We focused on market-related issues, but we’ve included other subjects of great interest to readers.

Woe is Portugal

The biggest shock of the week came Wednesday, when Banque Privee Espírito Santo SA of Portugal said its parent company, Espírito Santo International SA, would delay repayment of short-term notes that had been sold to private-banking clients through a Swiss subsidiary.

The parent company, which is privately held, announced in May it was in an “extremely negative financial position” because it had under-reserved for credit risk and had incorrectly valued assets.

The Dow Jones Industrial Average was down well over 100 points in early trading Thursday, but ended with a rather modest decline of less than 71 points, or 0.4%, to 16,915.07, despite headlines screaming of rising interest rates for Portuguese government bonds. But the worries were overblown, and when considering all the turmoil over the past several years, yields of less than 4.0% for 10-year Portugal bonds just aren’t that high.

The Federal Reserve’s unprecedented policies of greatly expanding its balance sheet to hold long-term interest rates down, while keeping short-term rates near zero since late 2008, has worked. Asset prices continue to recover, and we’ve all gotten away with something, because the official inflation rate has remained roughly 2%.

But Weidner pointed out that most investors haven’t been buying stocks, and U.S. GDP growth is nowhere near where it was during the previous bull market.

The Dow was down 1% for the week to close Friday at 16,943.81.

Fed minutes

The minutes of the Federal Open Market Committee’s June 17-18 meeting, released Wednesday, indicated the wind-down of the Federal Reserve’s “QE3” purchases of long-term U.S. Treasury and agency mortgage-backed securities will be completed in October, two months earlier than expected by many economists. QE3 was designed to hold down long-term interest rates, and the end of the bond-buying program sets the stage for a higher federal funds rate, which dictates commercial rates.

The news from the Fed helped push down stocks Thursday, because equity prices have a tendency to react negatively to indications of less accommodative interest rate policies.

In an interview with Bloomberg, Federal Reserve Bank of St. Louis President James Bullard said the continued decline in U.S. unemployment was likely to push inflation to 2.4% by the end of 2015, above the Fed’s long-term target of 2%. This could lead to a significant increase in short-term interest rates, which could spook equity investors, but would also be welcome by bankers, who are tired of seeing their net interest margins narrow.

Layoffs

It has been a while since we have seen almost daily headlines of massive layoffs across many industries, but General Cable Corp.
US:BGC
on Wednesday announced a restructuring that would “result in the elimination of approximately 1,000 positions globally, representing nearly 7% of the company’s workforce.”

General Cable expects to realize annual savings of $75 million in early 2016 and will record pretax charges of $200 million for the restructuring. The company’s shares declined 4% Thursday and went down another 2% Friday to close at $23.72.

Bank earnings

Wells Fargo & Co.
WFC, +0.80%
on Friday kicked off earnings season for the nation’s largest banks by meeting the consensus second-quarter earnings estimate of $1.01 a share, among analysts polled by FactSet.

The bank’s total revenue was down 1% from a year earlier to $21.07 billion, although it beat the consensus estimate of $20.76 billion. The year-over-year revenue decline reflected the industry trend of lower mortgage-banking volume. But the good news was that, quarter over quarter, mortgage-banking revenue rose 14% to $1.72 billion.

The Wall Street Journal on Tuesday said Citi is expected soon to announce a major settlement with the Department of Justice and federal regulators over sales of mortgages heading into the credit crisis. The settlement is expected to be for roughly $7 billion, which is far less than J.P. Morgan Chase’s own $13 billion mortgage-backed securities settlement in November. We’re only at the “leak state,” but all the previous major bank settlements have been preceded by similar leaks.

Wal-Mart’s troubles

William Simon, the president of U.S. operations for Wal-Mart Stores Inc.
WMT, +1.35%
in an interview with Reuters on Monday, said continued employment growth wasn’t translating into sales for the retailer, because of a lack of consumer confidence.

He said consumers were still willing to spend heavily during the holiday and back-to-school periods, but were cutting costs in between, which is “not the best thing for a retailer.”

Wal-Mart’s shares were up 1% for the week to close at $76.82 Friday. The shares are down 1% this year, following an 18% return during 2013.

Mergers & acquisitions

The flurry of M&A activity — one of the reasons many market watchers think stocks are overvalued — continued this week.

Lafarge SA
FR:LG
of Paris and Holcim Ltd.
CH:HOLN
of Switzerland on Monday said they would sell about $4 billion in assets to gain regulator approval for a $50 billion merger of the two cement companies. The units to be sold include all of Lafarge’s assets in Germany, and all of Holcim’s operations in France.

Lorrilard’s market value at Thursday’s close was $22.9 billion. The company’s shares Friday rose 5% to $66.01 on the news, while Reynolds was down 1% to $61.75.

Ukraine

The situation in Ukraine remains fluid, with daily reports of major battles between government forces and rebels supported by Russia. Ukrainian officials said at least 23 government soldiers had been killed in heavy fighting Friday, with 93 wounded, after a rebel rocket attack. This marks a setback after considerable recent territorial gains for the government.

Despite the lingering uncertainty, especially because so much Russian natural gas flows through Ukraine to supply heating fuel to Western Europe, investors have grown more comfortable. The price of crude oil
CLQ4, +0.00%
for August delivery on the New York Mercantile Exchange was down 3% for the week to $100.72 a barrel on Friday, while natural gas
US:NGQ14
was down 6% for the week to $4.15 per million British thermal units.

Retirement

Advice on how to save and invest for retirement, and how to enjoy a long, healthy period away from the rat race is always popular at MarketWatch. Here are a few of readers’ favorite articles this week.

Elizabeth O’Brien continued providing advice to people caring for elderly parents, this time discussing the serious credit implications of long-term-care contracts.

World Cup

The FIFA 2014 World Cup is drawing to a close, following Brazil’s shocking 7-1 defeat at the hands of the strong and fluid German team, while the Netherlands team came up short against Argentina, losing a dramatic 4-2 shootout.

Philip
van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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